A revolution for real estate funds

Fibo Quantum

Matthieu Bouchaud of ConsenSYS

Many of the world’s most influential projects were at first ignored – most investors failed to recognise their potential.

Which hotelier could have foreseen how Airbnb or Booking.com would impact the market? Which office owner or commercial real estate firm could have anticipated the great success of WeWork?

Of all the technological innovations emerging today, blockchain is undoubtedly one of the most misunderstood.

By virtue of its inherent security and transparency, the blockchain represents a major opportunity to transform the world’s largest real estate asset class (worth over £2.3trn in 2018) and in particular unlisted real estate funds.

Minimising cost

Unlisted real estate funds allow investors to indirectly own real estate assets by offloading property management and pooling risk.

In exchange, management companies responsible for the assets traditionally receive commission fees charged at the time of subscription, exchange, or sale.

What impact will blockchain have on the asset and wealth management industry?

However, by tokenising real estate assets on Ethereum, costly third-party intermediaries can be made redundant.

The blockchain enables the secure and transparent exchange of title deeds and value, optimising current real estate processes and removing third-party intermediaries from the equation.

From a cost saving perspective, it has the potential to reduce fraud, minimise error, increase accessibility, and create more robust and less expensive property registries.

The blockchain also permits a greatly accelerated and automated execution of issuance and exchange. This significantly increases the bandwidth of transactions, thereby reducing the minimum cost of subscription, which is currently set at about £1,000.

As a result, the size of the market increases and fosters new business opportunities.

For example, it is possible for a customer to save in an automatic way, by investing a few hundred pounds into a dedicated real estate fund every month.

This option is certainly very attractive for millennials, who are fans of automation and are existing customers of neo banks, like Revolut or N26 which have acquired over four million users in just three years, and are planning to offer commission-free investment services.

Maximising utility

Once real estate has been tokenised, its representative tokens can then be controlled by smart contracts, for which there are a multitude of uses.

For example, a smart contract can be used to condition the pledge of a token toward the repayment of a loan contracted from a bank or an individual (peer-to-peer).

Dividends received can then directly repay the monthly loan payments without intervention, and the remaining balance can be automatically reinvested into the fund, or paid to the investor. 

If the investor were to default on the loan, the seizure of tokens by the lender will automatically execute according to predefined rules.

A technological guarantee of risk reduction for the lender enables a reduction of interest rates for the borrower – the system is mutually beneficial.

Using blockchain in real estate